The recent JPEX incident has sparked a wave of public concern regarding the legitimacy of crypto exchanges and related service providers in Hong Kong. In particular, questions are being raised about how user interests can be adequately safeguarded. The JPEX incident, together with previous collapses of cryptocurrency giants, has thrown light on common features that potential scams can exhibit. As such, it has become imperative to differentiate legitimate entities from less reliable ones, and there are certain criteria that can be applied, some being absolutely essential, while others are desirable.
Essential Criteria
Cryptocurrency exchanges and related service providers, given that they handle and accept clients’ money and assets, ought to be classified more fittingly as Financial Institutions. This classification inherently implies that a standard system of controls and duties should be in place and subject to regular scrutiny. The first criterion, therefore, is Licensing. However, it is important to note that even fraudulent or inappropriate entities may boast some form of “license”. What matters most is the relevance of the license, particularly the type of license and the specific activities it regulates, and the jurisdiction of the regulatory coverage of such a license. For instance, JPEX claimed to have certain licenses, but none of them were from Hong Kong except the Money Service Operator (MSO) registration, which however lacks any relation to cryptocurrency and investment services.
Another crucial aspect is the transparency and competency of the owner and the leadership team members. The more detailed and informative the disclosure about its owners and leadership team, the more reliable the service provider. Conversely, potential scammers or abusive service providers would likely avoid listing their management teams, or if listed, the information would be scant, outdated, or even incorrect. Detailed backgrounds of key personnel, preferably corroborated by other reliable public sources, add to the credibility of the service provider. The less information disclosed about key management personnel, the less reliable the service provider.
Desirable Criteria
In today’s digital age, most financial service providers maintain a public website. Even JPEX had one. However, the mere presence of a website is a basic requirement and does not guarantee legitimacy. Additional factors, such as the physical location of the company, can help distinguish between reliable and less reliable entities. Legitimate providers usually have a domestic address accessible by local users. A lack of domestic presence and reliance solely on online interaction and ‘partners’ like local key opinion leaders (KOLs) or unlicensed stores operating ambiguously raises red flags.
Local banking partners also serve as a good indicator of a service provider’s legitimacy. Banks are typically highly regulated and possess robust financial crime compliance capabilities, so a service provider able to open a bank account with a local commercial bank for accepting client funds is likely to be more reliable. However, this is a basic indicator and does not guarantee legitimacy. It is more suspicious if a Hong Kong-based service provider does not use a bank account under its name to manage client funds, or if the account is outside Hong Kong or in another entity’s name, or if payments are conducted cross border.
A service provider’s partnerships can also offer insight into its reliability. The more reputable the partners, the more reliable the service provider. Reputable market players are usually cautious about their names being associated with partners, especially commercial banks, other regulated financial institutions, or large corporations. If a service provider does not mention reputable partners on its website or press releases, users should exercise caution. The nature and quality of such partnerships, especially those with local KOLs and stores, also matter. Service providers should typically engage with individuals who have a relevant professional and reputable background to represent them, rather than, for example, someone who has just been reprimanded by a regulatory authority or previous employer for misconduct.
Lastly, always scrutinize any unusual or exaggerated high return on investments. In a sophisticated international financial centre like Hong Kong, where almost everything is properly regulated and operates stably, such “amazing” speculative opportunities are unlikely to be available to the general public before professional market players have arbitrated them.
